Private Money Lending

[RenoJay]

I just met with a broker who arranges private money lending. The idea is that many people in my area (which has been devastated in the real estate bust) let their homes go to short sale or foreclosure, either of strategy or necessity. Some of these people want to get back into home ownership, but banks won't touch them. Enter the investor. The broker sets up individual investors to loan money to the borrowers, secured by the property itself. The rates are mutually agreed upon by borrower and lender, but typically the borrower will pay 1 point and 10 percent interest in addition to some fees to the broker. The borrower is typically required to put down a hefty down payment, like 35% of the purchase price, so they definitely have skin in the game. The lender has a first position lien on the property and a third party company impounds the insurance and property tax money and pays these bills. If the borrower defaults, the lender can foreclose which sounds like a pain, but it helps protect the lender's principle.

My questions:

1) Have any Bogleheads done anything like this?
2) What would you be particularly wary of? (Please take it as a given that the borrower's income, job references and credit report will be evaluated.)
3) Other words of wisdom?

thanks!

[alec]

If they've a lready been foreclosed on, and the banks won't loan them money, how do they have the money to put 20-35 % down?

[dm200]

If they've a lready been foreclosed on, and the banks won't loan them money, how do they have the money to put 20-35 % down?

Exactly my question! If these former homowners had this much cash when they owned the previous homes that were foreclosed on, then why did they let the homes go? A similar question is why wouldn't the banks (or other lending institutions) make these loans directly IF they are such a good deal for the lender?

[indexfundfan]

If they've a lready been foreclosed on, and the banks won't loan them money, how do they have the money to put 20-35 % down?

These could be strategic defaults -- i.e. have money to pay but since house is under water, decide to just return the keys to the bank and buy another at a lower price.

For me to even remotely consider making such loans, I would want such borrowers to have LOTS of skin in the game. Otherwise, you can be sure they will return you the keys if housing price drops further.

[greg24]

I'd be wary of directly lending to individuals, and I certainly wouldn't be seeking out the segment of the population that is being foreclosed on.

[roymeo]

I'd rather lend in a diversified way via Prosper, LendingClub, etc. etc.

[Noobvestor]

I'd rather lend in a diversified way via Prosper, LendingClub, etc. etc.

LendingClub user here: it isn't exactly diversified, either - you have the various risks of going *through* LendingClub in the first place, and a pretty limited demographic of users relative to the broader lending market. That said, it's probably more diversified than what the OP is talking about.

[ilmartello]

it's a good deal.....
for the guy taking 1 percent and 10 percent interest commission

[xerty24]

If you get good collateral, 10-12% is reasonable interest for this type of lending.

[Muchtolearn]

This has to be a troll thread. Nobody would make this loan.

[RenoJay]

This has to be a troll thread. Nobody would make this loan.

It's not a "troll" thread. I am seriously considering this type of loan. Like another person on this thread, I lend through LendingClub and have had a generally favorable experience. The problem with LendingClub, however, is that the loans are unsecured, i.e. no recourse. In this case, it would be seeking out secured loans in my own backyard and doing individual due diligence on both the borrowers and the properties. Yes, the borrower would need plenty of skin in the game and would need to pay 10% for me to consider making the loan. I haven't yet evaluated borrowers, so I don't know individual circumstances, but I believe many probably were strategic defaulters. Also, I know from experience that banks are currently extremely tight. I've heard stories of guys with $20 million in the bank being rejected for mortgages because they didn't have income up to bank standards. If I can find a strategic borrower who had the means to pay but chose not to because his house dropped 60%, then I think it's really a question of whether I believe the next house will drop more than the price of his down payment (which I would require to be in the 35% - 40% range.)

Anyway, it sounds like no one has had personal experience with this so I'll continue to do diligence in other ways. Thanks to all who contributed thoughts.

[RenoJay]

One more thing I'll add to the motivation to consider this is that for the past few months I've been looking for real estate investment opportunities. What I discovered in my area is that the cap rate (i.e. expected rate of return if I pay cash) for multi family properties is in the 7% - 7.5% range, and that for single family homes it's much lower, and that many of the properties are older and hence ripe for unexpected repairs. Compared with this, the thought of putting the same money into lending started to sound better because it's an expected 10% rate of return, and if I need to foreclose on a property, I'll essentially get it for 35% less (i.e. the borrower's down payment less) than if I bought it today. At a 35% discount, many homes would look attractive to me today.

[ilmartello]

I don't think anyone is going to give you 40 percent down payment with a 10 percent interest rate.
Furthermore,

based on your location, Nevada, I think local real estate is a disaster. Nevada doesn't have much of an economic base, most of the build-up was around Las Vegas.

Nonetheless, my advice is worth what you paid for it

[FrugalInvestor]

it's a good deal.....
for the guy taking 1 percent and 10 percent interest commission

Exactly! He's figured out a way to get his money up front and get out while the gettin' is good, leaving you shouldering all the risk. Great deal, for him.

[CaliJim]

I wouldn't do it, and if I did do it, I'd only go in with less than 1% or 2% of my port.

[traineeinvestor]

I'd think long and hard about doing it. You are essentially making loans which the banks have not been willing to make. If you are going to proceed:

1. go through a lawyer who works for you (not anyone else involved) and who will ensure that you get the security that you are expecting and can explain the proceedure and estimate the costs of enforcing should it become necessary

2. build in a hefty margin of security that allows for late payments, costs, taxes and however long it will take to enforce the loan and force a sale if the borrower defaults, Price your deal off the assumption that they will default. Take into account whether the property is in a no-recourse state

3. make sure you have a thick skin - you may need it

[Valuethinker]

My gut reaction

'It's amazing how many ways people find to put money to work, by covering it in lighter fluid and lighting a match'.

A more intellectual reaction might be how much could go wrong, possibilities of fraud, difficulties of recovering etc.

Historically private lending has been dominated by men in dark suits and shirts, members of Sicilian-American fraternal organizations. They have individuals with square, shaven heads to collect on bad debts.

There may be an opportunity here-- there's certainly a need.

However I would not risk more than you can afford to lose.

[MossySF]

Probably the best way to do private lending is to offer owner financing for properties you own outright. Target the bad credit segment and continually foreclose on defaulters.

[dickenjb]

I would consider this if it was done as a partnership where I held 25% of the debt on 4 properties with 3 other partners. Would not be so keen on holding all the debt on one property. Can you find some investors like yourself and form a partnership? Maybe the broker would even assist you to meet like minded investors.

And I don't think the argument that you are taking a deal the banks won't touch compelling. Banks have to lay off their mortgages onto others and just because this don't meet their underwriting / securitization standards doesn't mean it isn't an ok deal risk adjusted wise.

[RenoJay]

I would consider this if it was done as a partnership where I held 25% of the debt on 4 properties with 3 other partners. Would not be so keen on holding all the debt on one property. Can you find some investors like yourself and form a partnership? Maybe the broker would even assist you to meet like minded investors.

And I don't think the argument that you are taking a deal the banks won't touch compelling. Banks have to lay off their mortgages onto others and just because this don't meet their underwriting / securitization standards doesn't mean it isn't an ok deal risk adjusted wise.

Thanks for the opinion. I'm typically not crazy about working with partners (although I do believe I could find some.) I just don't like the decision by committee concept. What do you think about holding 3-4 loans. In my area, there are homes from $50k and up so I could potentially make 4 loans in the $50k range to diversify.

[CaliJim]

Nope.

This would still not be what one would call "investing".

This is much more like "speculating" or "being in business" or as suggested above "burning money with accelerant".

[CaliJim]

Statistically - one needs at least 30 samples - and hundreds are better - depending on what the standard deviation- for the average outcome to approach the mean.

What is the base rate?

Do you know what the statistical average rate of return is on private money lending?

In order to achieve this average rate of return with any degree of confidence at all - you'd need hundreds of loans outstanding.

3 or 4 is a train wreck waiting to happen.

[HomerJ]

started to sound better because it's an expected 10% rate of return

If it sounds too good to be true...

How many people are willing or able to put down 35% AND pay 10% interest?

[xerty24]

I think you guys are being too harsh, which just means higher returns for the more enterprising hard money lenders out there. It should be pretty simple - if the collateral is good and they're putting 35% down, you've got a highly secured asset paying ~10%. Do you really think home prices are going to fall another 35%+? Do you think they're going to destroy the home? Otherwise, what's the problem?

[CaliJim]

I think you guys are being too harsh, which just means higher returns for the more enterprising hard money lenders out there. It should be pretty simple - if the collateral is good and they're putting 35% down, you've got a highly secured asset paying ~10%. Do you really think home prices are going to fall another 35%+? Do you think they're going to destroy the home? Otherwise, what's the problem?

are these first deeds of trust?

[RenoJay]

I think you guys are being too harsh, which just means higher returns for the more enterprising hard money lenders out there. It should be pretty simple - if the collateral is good and they're putting 35% down, you've got a highly secured asset paying ~10%. Do you really think home prices are going to fall another 35%+? Do you think they're going to destroy the home? Otherwise, what's the problem?

are these first deeds of trust?

Yes, I would have the first deed of trust. The more I study this, the less I'm seeing the down side IF, as CaliJim points out, I vet the collateral pretty well. If I do, then I would need to expect values to drop roughly another 35% before I'm really at significant financial risk. (I understand there's significant "headache risk" doing a foreclosure, but apparently there are firms out there that handle all the details.) Regarding needing 30 loans for diversification, that would be great but it seems like vetting the particular collateral and finances of the buyer are most important when getting started.

If I go through with this, it seems to me like the most important criteria are:

1) Assess borrower's financial condition. If steady income based on paystubs and tax returns is there, that's step one.
2) Determine why the borrower can't get a better loan. If the loan size is either smaller than a bank will do (i.e. $50k) or if the borrower had a strategic default for a deeply underwater home but otherwise kept up on all their other payments, then I can see merit in the borrower's "story".
3) Assess the property. My belief is that single family homes in decent parts of town are pretty close to their bottoms for price, or at least are not likely to drop another 35%. Even if they do drop that much and I foreclose with an asset worth less than my original investment, the cash flow from bringing in a tenant would be pretty decent. (I recently bought a very nice $150k single family home nearby that was built in 2010. I have a tenant paying $1,375/month on it. So the back up question is what kind of rent can I get it I end up needing to sit on a foreclosed asset.)
4) Make sure that the 35% down payment truly belongs to the borrower and is not a loan from someone else. I guess the way to do this would be to make sure the $$$ has been in their bank account for some time. It seems to me that if someone is risking that much of their own money, they're more likely to act in a responsible way toward the home and the mortgage than if they have no skin in the game.

Any other suggestions from people who have real advice as opposed to simply scolding me for considering something they would never consider themselves? There's an element of entrepreneurial risk-taking involved with this concept that does not necessarily lend itself to the Boglehead philosophy, but I feel like Ben Bernake came to me in a dream and said, "Take some more risk if you intend to ever get any yield in the next five years."

[Jerilynn]

I think you guys are being too harsh, which just means higher returns for the more enterprising hard money lenders out there. It should be pretty simple - if the collateral is good and they're putting 35% down, you've got a highly secured asset paying ~10%. Do you really think home prices are going to fall another 35%+? Do you think they're going to destroy the home? Otherwise, what's the problem?

are these first deeds of trust?

Yes, I would have the first deed of trust. The more I study this, the less I'm seeing the down side IF, as CaliJim points out, I vet the collateral pretty well. If I do, then I would need to expect values to drop roughly another 35% before I'm really at significant financial risk. (I understand there's significant "headache risk" doing a foreclosure, but apparently there are firms out there that handle all the details.) Regarding needing 30 loans for diversification, that would be great but it seems like vetting the particular collateral and finances of the buyer are most important when getting started.

If I go through with this, it seems to me like the most important criteria are:

1) Assess borrower's financial condition. If steady income based on paystubs and tax returns is there, that's step one.
2) Determine why the borrower can't get a better loan. If the loan size is either smaller than a bank will do (i.e. $50k) or if the borrower had a strategic default for a deeply underwater home but otherwise kept up on all their other payments, then I can see merit in the borrower's "story".
3) Assess the property. My belief is that single family homes in decent parts of town are pretty close to their bottoms for price, or at least are not likely to drop another 35%. Even if they do drop that much and I foreclose with an asset worth less than my original investment, the cash flow from bringing in a tenant would be pretty decent. (I recently bought a very nice $150k single family home nearby that was built in 2010. I have a tenant paying $1,375/month on it. So the back up question is what kind of rent can I get it I end up needing to sit on a foreclosed asset.)
4) Make sure that the 35% down payment truly belongs to the borrower and is not a loan from someone else. I guess the way to do this would be to make sure the $$$ has been in their bank account for some time. It seems to me that if someone is risking that much of their own money, they're more likely to act in a responsible way toward the home and the mortgage than if they have no skin in the game.

Any other suggestions from people who have real advice as opposed to simply scolding me for considering something they would never consider themselves? There's an element of entrepreneurial risk-taking involved with this concept that does not necessarily lend itself to the Boglehead philosophy, but I feel like Ben Bernake came to me in a dream and said, "Take some more risk if you intend to ever get any yield in the next five years."

Seems like a whole lot of effort for a *possible* 10% return.

[HomerJ]

I think you guys are being too harsh, which just means higher returns for the more enterprising hard money lenders out there. It should be pretty simple - if the collateral is good and they're putting 35% down, you've got a highly secured asset paying ~10%. Do you really think home prices are going to fall another 35%+? Do you think they're going to destroy the home? Otherwise, what's the problem?

I'd be scared I was missing something.

It sounds like a nearly risk-free 10%.

If my years on this planet have taught me anything, it's that there is no risk-free 10% out there.

[HomerJ]

There's an element of entrepreneurial risk-taking involved with this concept that does not necessarily lend itself to the Boglehead philosophy

Where's the risk? The situation you have described seems like a slam-dunk. So either you're missing something, or it is risk-free. So go for it.

Still a little confused where you're going to find people who were foreclosed upon, but can afford 35% down, and want to live in a $50k house.

[MossySF]

I know of somebody who does this kind of business and the key to making money is the repeat factor. You buy cheap houses and do owner-financing to those with bad credit. They inevitably default so you kick them out, keep their small down payment and repeat with the next set of suckers. It's not really a passive investment -- more like being a slumlord. The 35% down is unrealistic though -- 3.5% is more like it.

[RenoJay]

I know of somebody who does this kind of business and the key to making money is the repeat factor. You buy cheap houses and do owner-financing to those with bad credit. They inevitably default so you kick them out, keep their small down payment and repeat with the next set of suckers. It's not really a passive investment -- more like being a slumlord. The 35% down is unrealistic though -- 3.5% is more like it.

Mossy...interesting take. My reason for exploring this is because I don't want to own the property. I agree with many of the posters that it may be challenging to find borrowers with 35% down payment and willing to pay 10%. That said, I can afford to be patient and picky. I believe they probably do exist in my area because lots of steadily employed people did strategic defaults on their homes in the past few years. For them, the math works out. If they defaulted on a home in 2009 when they owed $350k, they could probably now buy a similar home for $150k. They could pay 10% interest for a few years until their credit improves, and then refi to a more reasonable rate. In this scenario, I'd be more of a pay day lender than a slum lord. From my perspective, it seems reasonable if I can hedge my risk.

[Radnog]

I personally would not be interested in making such a loan.

[Jerilynn]

I believe they probably do exist in my area because lots of steadily employed people did strategic defaults on their homes in the past few years. For them, the math works out. If they defaulted on a home in 2009 when they owed $350k, they could probably now buy a similar home for $150k. They could pay 10% interest for a few years until their credit improves, and then refi to a more reasonable rate.

Ok, lets run some numbers. Assume they owed $350k on their home and somehow had $52.5k in cash (the 35% downpayment), would they be 'allowed' to strategically default without the mortgage company coming after that $52k somehow?

I'll betcha a pizza that the number of folks able to put down 35% and willing to pay 10% is very low.

[xerty24]

If my years on this planet have taught me anything, it's that there is no risk-free 10% out there.

It doesn't have to be risk free - it just has to be lower than whatever the risk is for a 10% yield junk bond. If it's even just "low risk", getting 10% can be a bargain. I've seen plenty of nearly risk-free 10% returns out there, but since they aren't in RE (local competition only, high barriers), it's almost never in my interest to discuss them.

Ok, lets run some numbers. Assume they owed $350k on their home and somehow had $52.5k in cash (the 35% downpayment), would they be 'allowed' to strategically default without the mortgage company coming after that $52k somehow?

In many states, the mortgage company has no recourse to anything but the house. Even in the rest of them, the state of bank mortgage documentation is often so bad these days that they're lucky if they can prove they own the property to foreclose, let alone sue you for their losses after that.

[Muchtolearn]

I suggest we all stop feeding this OP. He obviously wants to make the loan. Everybody here thinks he shouldn't. I don't know why he asked his question. Let him make the loan if he wants and let's stop feeding him.

[CaliJim]

I was randomly supervising the internet and a thought occurred to me that related to this thread:

One scenario is that the buyer defaults, you end up in some variation of this situation:

neighborhood goes to seed
new owners trash the place and stop paying the mortgage and pmi
you need to spend money for a lawyer to foreclose,
you need to spend money for a professional eviction,
you spend money fixing the place up
you can't find a new buyer at any reasonable price,
you cant find a renter you approve of,
you end up paying for ongoing maintenance
you end up paying for property tax

In no way is this a passive investment - it is a job

Another way to do this would be to buy property yourself, and rent it out on a rent-to-own basis. Easier to handle the eviction if needed. And if they choose to buy and you choose to carry back paper, you'd have history with the guy and have some idea of his reliability.

Sorry for feeding the troll.

[RenoJay]

I suggest we all stop feeding this OP. He obviously wants to make the loan. Everybody here thinks he shouldn't. I don't know why he asked his question. Let him make the loan if he wants and let's stop feeding him.

Actually I was looking for constructive thoughts from people who had any type of experience with this, not a bunch of scolding from people who cannot think past stock mutual funds and bond mutual funds and had no valuable input. To those who provided constructive feedback, whether or not it agreed with my original hypothesis, I am grateful. For the rest, by all means stop "feeding" me.

[madbrain]

Probably the best way to do private lending is to offer owner financing for properties you own outright. Target the bad credit segment and continually foreclose on defaulters.

Wouldn't it be simpler to just rent it out ?

[xerty24]

Probably the best way to do private lending is to offer owner financing for properties you own outright. Target the bad credit segment and continually foreclose on defaulters.

Wouldn't it be simpler to just rent it out ?

Simpler, yes. But with owner financing, you get to keep the house and their downpayment and their principle payments when they eventually default. Sure it's some headache to foreclose, but maybe you're a lawyer and that's pretty easy for you. You can always pay them a couple grand to leave without trouble.

[madbrain]

Simpler, yes. But with owner financing, you get to keep the house and their downpayment and their principle payments when they eventually default. Sure it's some headache to foreclose, but maybe you're a lawyer and that's pretty easy for you.

You can always pay them a couple grand to leave without trouble.

I don't know, if they put a big downpayment and are losing it in foreclosure, I am not sure this will be that much incentive for them to leave without trouble.
Not a game I would play.

I was selling my house and had a buyer for my former home. They only had 5% down. The lender didn't approve them for more than 80% LTV loan.

The buyers asked me to do a second loan for the missing 15%. I turned them down because my loan would have been in second position and there was no chance I would ever see a cent in case of default - the bank with the 80% loan would take the house and I would be wiped out.

If my loan was in first position, I might have considered doing it, given a large enough downpayment. But that wasn't applicable.

In 15 months since that sales contract was cancelled, the appraised value went down by 21%, according to an appraisal done for a refi 2 weeks ago. I might have been better off doing it after all. I still own the home and I'm renting it out, waiting for better days.

[MossySF]

Probably the best way to do private lending is to offer owner financing for properties you own outright. Target the bad credit segment and continually foreclose on defaulters.

Wouldn't it be simpler to just rent it out ?

Probably can't earn much renting it out. What would a $50K shack rent for? On the otherhand, you sell the "dream to own" and get 50%+ more "rent/deposit"?

[market timer]

I hope you do it and please kept us posted. There are many opportunities that exist outside of index funds, and many reasons why Corporate America misses opportunities like this.

[RenoJay]

I hope you do it and please kept us posted. There are many opportunities that exist outside of index funds, and many reasons why Corporate America misses opportunities like this.

Thanks. There are good reasons in this thread to be skeptical and I plan to suss this out very carefully and IF I do it I'll dip a toe in with my funny money account. (I believe even Boglehead philosophy lends itself to "playing" with 5% of your assets.) I'll keep you informed whether it turns out to be a goldmine or a complete bust.

[Abe]

Several years ago a local real estate agent called me because she knew I bought owner financed mortgages. She told me that she was selling houses that had been foreclosed through a government program called the Officers Next Door Program. She would sell the house to a police officer for half the appraised value. This program now includes other government employees as well. Since some of the buyers could not get loans because of bad credit, she was looking for private investors to finance the houses. The interest rate was high. I tried one of these to see how it worked out and I have since done a lot of them. The first ones did real well because the buyers would make the payments to me and then refinance and pay me off. After the big market crash everything changed. These people could not qualify for new loans. After 2007 I have had some take bankruptcy, some default and some are just a little behind. Since I only loaned half the value I did not feel that It was that risky. I foreclosed on one and got the property back. I sold it and made a nice profit. Another one I foreclosed on and got it back. I just rented that one out until the market gets better to sell it. I have a couple that took bankruptcy, and I actually get the payments in a more timely manner than before the bankruptcy. I have a couple that are behind but not to point I want to foreclose so I am just nursing them along. So, all together, I would say they are more trouble now than before the crash, but it is still lucrative. Is this for everybody -- probably not. However, I think that we sometimes overreact to investments that we consider to be risky. Some people might say this is too risky. The way I looked at it was, I'll try one and see how it works. I'm only putting half the value in. I can't lose much." This has been my experience with a lot of investments. I have had to make myself do some of these things, but looking back, I am glad I did. Sometimes you just have to jump in the water. Having said all that, I am not telling th OP to do it or not do it. Everyone has to individually weigh all the factors and make a decision.

[RenoJay]

One scenario is that the buyer defaults, you end up in some variation of this situation:

neighborhood goes to seed
new owners trash the place and stop paying the mortgage and pmi
you need to spend money for a lawyer to foreclose,
you need to spend money for a professional eviction,
you spend money fixing the place up
you can't find a new buyer at any reasonable price,
you cant find a renter you approve of,
you end up paying for ongoing maintenance
you end up paying for property tax

In no way is this a passive investment - it is a job

Another way to do this would be to buy property yourself, and rent it out on a rent-to-own basis. Easier to handle the eviction if needed. And if they choose to buy and you choose to carry back paper, you'd have history with the guy and have some idea of his reliability.

CaliJim...yes, this is pretty much my nightmare scenario as well. I did some good due diligence today and spoke to people who make these loans as well as a foreclosure company that helps you when the borrower stops paying. The neighborhoods going to seed is a valid concern, although in my area (northern Nevada) I feel it's pretty much already happened so it involves carefully choosing areas where I'd consider writing loans. New owners stop paying mortgage is a legit. fear. The protection is a huge down payment from them and being first in line for foreclosure. As far as trashing the place, the people I spoke said that happens, but it's not that common...maybe 3% - 5%. Also, it's against the law apparently so I could threaten legal action to ward that off. That said, it's a real risk. The rest of it regarding expenses, tenants, etc. seems to me to be primarily a function of making sensible underwriting decisions, primarily regarding the home, its location and how much I'd consider lending on it. The best advice I received today was, "Don't loan on a home you wouldn't want to own." Regarding passivity, you're right...it's not like buying a fund. I did, however, find out that there are professionals who do every step of this (for a fee of course) so there's always the option to outsource. I remain interested, yet extremely cautious, of this route to yield. I think I'll start evaluating loans and probably pass on lots and lots until I learn the lay of the land. I took this approach a few months ago while evaluating buying multi-family properties and ultimately decided the reward did not justify the risk. Maybe I'll have the same conclusion on this in a few months, or maybe I'll discover that 10% yield is possible. I'll report back for the people who may be silently considering this themselves.

[CaliJim]

Good stuff! You got your eyes open and seem to be going about this the right way. Good luck. Interested in hearing if anything comes of this.

[Abe]

RenoJay wrote: The best advice I received today was, "Don't loan on a home you wouldn't want to own."

This is very good advice. The person who taught me all about buying mortgages said, "don't put anymore into it than an amount you would be happy to own it for."
That person was Jimmy Napier from Chipley, Florida. He wrote a book years ago titled "Invest in Debt". If you are interested in these kinds of investments, I would recommend you order his book. You can order it here: http://www.jimmynapier.com/investindebt.php
At the very least, I would get his book and a Texas Instrument BA II plus financial calculator. The book (Invest in Dept) cost $24.00 free shipping or with damaged cover $18.00 free shipping. The calculator at Walmart is about $30.00. The book will teach you how to use the calculator. What I learned from that book and how to use the calculator has made me a lot of money through the years. If you want to you can PM me and I will try to help you. You don't need to do this until you get a little education about mortgage notes.

[KSActuary]

I suggest we all stop feeding this OP. He obviously wants to make the loan. Everybody here thinks he shouldn't. I don't know why he asked his question. Let him make the loan if he wants and let's stop feeding him.

Actually I was looking for constructive thoughts from people who had any type of experience with this, not a bunch of scolding from people who cannot think past stock mutual funds and bond mutual funds and had no valuable input. To those who provided constructive feedback, whether or not it agreed with my original hypothesis, I am grateful. For the rest, by all means stop "feeding" me.

Actually, it's "not a bunch of scolding from people who cannot think past stock INDEX funds and bond INDEX funds and had no valuable input". Fixed it for you.

Hard money lending is a tough business and I would structure your deal a little different. Most hard money lending is a bridge loan until they can find better long term financing. These deals don't have to be distressed or foreclosures. There are a lot of professionals out there that the banks won't touch and they need the money. Example - doctor gets in a jam in his practice and he has a $2 million house with $1.4 million in equity but has bad credit due to problems in his practice. Banks won't touch him no matter what the equity. You help with a bridge loan and charge a bunch of upfront fees.

What you are describing is the "Bailey Building & Loan" approach and you will have plenty of takers but all may be bad risks and you end up with the home. Quick way to become a landlord. If you have the money to invest and the stomach for the risk, there are better hard money lending strategies.

[jasonl]

This scenario is less risky. I would look into buying a multi-family home in the area, put down the 30% or whatever the bank requires.

1. Work it out so you have positive cash flow or go aggressive to pay the mortgage down faster, but at least break even... leave a little wiggle room for repairs.
2. Let the renters pay the mortgage down 3-5 years... or longer
3. Offer a "lease to purchase" clause to one of the tenants upon renewal of their lease, but require a small non-refundable down payment, which will be applied to the purchase price should they exercise the option to buy, but is non-refundable if they don't.
4. Agree upon a purchase price.
5. Agree upon an interest rate. Offer a percent of the rent to be applied to the purchase price.
6. Offer owner-financing with a lien on the property.

There are some further details to this and I didn't list them all, but you could have a guaranteed check for years, without the headache of being a landlord (I am one).

Jason

[RenoJay]

Back in February I started this thread about private money lending. Now that I have some experience, I thought I'd report back for anyone who's looking for fixed income outside of the bond market.

I've made two loans and about to do a third. Here are the basics:

1. First borrower had credit issues from a short sale of a vacation property. He bought a newer home in my area, put down about 40% cash down payment and borrowed the rest from me at 8.5%. Our letter of intent stated he needed to make automated payments via a processor. Thus far, every single payment has arrived a few days before the first of the month. So far so good.

2. Second borrower also bought a newer home with about 40% down payment. Interest rate to me is 9.5%. Same deal as the first borrower (all payments received) except they pay on the 4th instead of the 1st.

3. Third deal is about to close. The home is older, but still is valued at more than the buyer is paying, and they're putting down 33%. They'll pay 10% interest and 3/4 of a point at closing.

In all cases, the broker and I checked their credit, their employment, their taxes and met with them personally. We also checked the homes, got inspections, etc. In each case, the borrowers were "near bankable" meaning they all had good credit but had done a strategic short sale at some point when their homes went deeply underwater.

Overall, I'm quite happy with this new found investment class. Each home has plenty of equity so should I ever need to foreclose I should be able to get my money back. All the payments have arrived like clock work, and I get the chance to meet each borrower, look them in the eye, and let them know that late payments will lead to them losing their home. Unless home values tumble tremendously from here, then I've definitely become a fan of hard money lending for my fixed income portfolio.